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Weekly Market Commentary | April 21, 2022
Here’s a riddle: How can inflation be 8.5 percent and 6.5 percent at the same time? The answer is that it depends on how you measure it.
Determining how quickly prices are rising or falling – and where they may be headed in the future – is not simple. In the United States, millions of goods and services are bought and sold every day – shelter, food, transportation, energy, water, education, childcare, equipment and tools, medical care, furnishings, apparel, trash removal, and much more.
The government relies on two indexes: the Consumer Price index (CPI) and the Personal Consumption Expenditures Index (PCE). Each index has two versions: headline inflation and core inflation.
Last week, the Bureau of Labor Statistics (BLS) reported that CPI headline inflation was up 8.5 percent in March, and CPI core inflation was up 6.5 percent.
The BLS does not collect every price in every part of the United States. It gathers prices in 75 cities, collecting data from about 6,000 households and 22,000 department stores, supermarkets, hospitals, gas stations, and other establishments. So, the CPI is a measurement that reflects the experience of urban consumers.
CPI headline inflation
Last week, the CPI showed that headline inflation, which includes all price changes collected, was up 1.2 percent from February to March, and up 8.5 percent for the 12-month period that ended March 31. The largest increases in the CPI were:
CPI core inflation
The BLS also reported on core inflation, which is the CPI minus food and energy prices, and was lower than headline inflation. The core CPI was up 0.3 percent from February to March, and up 6.5 percent for the 12-month period that ended March 31.
Why would anyone want to exclude staples like food and energy from inflation?
The answer is that food and energy prices are volatile – food and energy are commodities that trade on exchanges – and can distort inflation readings. “Trying to manage monetary policy with gauges that fluctuate wildly would be like driving a car where the speedometer was constantly fluttering between 30 mph and 60 mph. Taking a long-term average may reduce the effect — but only for looking at the past history. Policymakers are forward-focused. They need guidance on where the inflation trend is headed. High volatility obscures that trend,” explained George Calhoun of Forbes.”
To sum up: headline CPI reflects Americans’ cost increases in the recent past, while core CPI is a better indicator of where inflation may be headed, reported Joseph Haubrich of the Cleveland Federal Reserve.
It’s important to note that the Federal Reserve relies on the PCE when making policy decisions. The PCE is a broader measure of inflation than the CPI. The PCE includes measurements taken in urban, non-urban, and rural areas.
Sources:
https://www.bls.gov/news.release/cpi.nr0.htm
https://www.forbes.com/sites/georgecalhoun/2022/02/28/more-problems-with-inflation-coping-with-volatility/?sh=40c063a31f18 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/04-18-2022_Forbes_More%20Problems%20with%20Inflation_2.pdf)
https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2014-economic-trends/et-20140417-pce-and-cpi-inflation-whats-the-difference.aspx
https://www.federalreserve.gov/newsevents/speech/powell20220321a.htm
https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2014-economic-trends/et-20140417-pce-and-cpi-inflation-whats-the-difference.aspx
https://www.barrons.com/articles/sell-stocks-in-may-51650064493?refsec=the-trader&mod=topics_the-trader (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/04-18-2022_Barrons_Selling%20Your%20STocks%20in%20May%20and%20Go%20Away%20Could%20Be%20the%20Best%20Strategy%20This%20Year_6.pdf)
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202204
https://www.goodreads.com/quotes?page=6
https://en.wikipedia.org/wiki/Generation_Alpha
https://www.visualcapitalist.com/timeline-of-us-events-that-defined-generations/
https://www.visualcapitalist.com/wp-content/uploads/2021/05/generational-power-index-2021-1.pdf
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